US Dollar weakens ahead of Fed interest rate decision

The US Dollar weakens against its major rivals on Wednesday.
The US Dollar Index declined below 101.00 after closing in the red on Tuesday.
US Federal Reserve raised the policy rate by 25 basis points as expected.

The US Dollar struggles to stay resilient on Wednesday as investors assess the US Federal Reserve's (Fed) policy decisions and Chairman Jerome Powell's comments on the policy outlook. The USD index – which tracks the USD's valuation against a basket of six major currencies – remains on track to end the day deep in negative territory near 101.00.

The Fed raised its policy rate by 25 basis points (bps) to the range of 5.25%-5.5% following the July policy meeting as expected. The Fed made little adjustments to the policy statement from June and the publication failed to trigger a market reaction. In the post-meeting press conference, Powell's cautious comments on further policy tightening caused the USD to come under renewed selling pressure.

Powell refrained from confirming another rate hike this year and said that every policy meeting will be live. "If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point," Powell told reporters and noted that the policy was already restrictive.

Daily digest market movers: US Dollar on the back foot following Powell presser

Commenting on the Fed event, "Fed Chair Jerome Powell refused to give forward guidance and stressed the importance of data. The bank will make decisions on a meeting-by-meeting basis. While it upgraded its comments on the economy – moderate instead of modest growth – it sees expansion as a good thing," said FXStreet Analyst Yohay Elam. "Regarding the burning topic of inflation, the Fed is holding off the champagne bottles, saying the latest report could be a one off. Nevertheless, it sees current policy as restrictive. "
According to the CME Group FedWatch Tool, the probability of one more rate increase this year stands at around 30%.
Consumer sentiment in the US continued to improve in July, with the Conference Board's Consumer Confidence Index rising to 117.0 from 110.1 (revised from 109.7) in June.
Further details of the publication showed that the Present Situation Index climbed to 160.0 from 155.3 and the Consumer Expectations Index advanced to 88.3 from 80.
House prices in the US rose by 0.7% on a monthly basis in May, the monthly data published by the US Federal Housing Finance Agency showed on Tuesday. This reading followed the 0.7% increase recorded in April and came in better than the market expectation of a 0.2% rise.
The benchmark 10-year US Treasury bond yield declined toward 3.85% during the American trading hours.
US S&P Global Manufacturing PMI improved to 49.0 in July's flash estimate from 46.3 in June. Services PMI edged lower to 52.4 from 54.4 in the same period. Finally, Composite PMI declined to 52.0 from 53.2, pointing to an ongoing expansion in the private sector's business activity, albeit at a softening pace.
Commenting on PMI surveys' findings, "July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter," he added.

Technical analysis: US Dollar Index trades near key support

The US Dollar Index (DXY) touched the 20-day Simple Moving Average (SMA), currently located at 101.50, on Tuesday but closed the day below that level. Additionally, the Relative Strength Index (RSI) edged lower toward 40 after failing to stabilize near 50, reflecting buyers' hesitancy.

On the downside, DXY faces immediate support at 101.00 (former resistance, static level). A daily close below that level could trigger an extended slide toward 100.50 (static level) and 100.00 (psychological level, static level).

Looking north, a daily close above 101.50 (20-day SMA) could attract bulls and open the door for a leg higher toward 102.00 (static level, former support) and 102.50-102.60 (50-day SMA, 100-day SMA).

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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